Research shows risk‑averse producers sell earlier in grain marketing year

A new study from University of Nebraska–Lincoln agricultural economists finds that producers with safety‑first risk preferences likely make notably different grain‑marketing decisions than those without, offering a glimpse into how and why producers market their harvests. 

Specifically, according to the economic experiment highlighted in the article published in Agricultural Financial Review, participants with safety-first risk preferences sell about 8.45% more of their harvest in the first month of the marketing year. And it is likely that many producers have safety-first risk preferences in the real world, as 45% of experiment participants showed safety-first preferences, even in the controlled stylized setup.

Safety first — a behavioral basis for decisions made under risk and uncertainty to minimize the probability of a disastrous outcome and produce a minimal accepted return on investment — has been widely applied to economics literature but has gotten little attention in the agricultural economics space, especially in the examination of grain marketing decisions. 

Previous research into decisions on grain marketing has mostly relied on surveys or workshop questionnaires. The study from Husker ag economists Cory Walters, Simanti Banerjee and Karina Schoengold, and alumna Stamatina Kotsakou, now an assistant professor at California Polytechnic State University, San Luis Obispo, gamified the grain-selling process for a large group of students with agriculture backgrounds to uncover reasoning and behaviors behind grain selling decisions. By systematically varying the economic incentives faced by the students, the researchers were able to study evolution of decision making in real time.

“This was an innovative way to see how producers made choices across different years of different outcomes which they couldn't see,” Walters said. “We want to know what the underlying factors are driving their reality and uncover something that has never been uncovered (in previous research) where people with these safety-first preferences are just going to sell a certain amount of crop at harvest, regardless of whatever the economics tell them to do. They want to take some price risk off the table.”

During the experiment, participants’ risk preferences and attitudes were gathered first. Then, using the context-rich grain marketing experiment created with the MINE Program at UNL, the researchers tracked individuals’ decisions on if and when to sell grain in multiple years. Banerjee, who guided the development of the game methodology, said they used real price points from four years to mimic real-life decisions.

“In real life, since producers face prices that are falling, rising or stable, we wanted to capture that in the experiment with those different price series,” Banerjee said. “This would make the experiment a closer representation of reality.”

Grain markets are always noisy, and it is difficult for economists to gauge why farmers sell when they do, and it plays a role in management of resources.

“As scientists, we want to find out what is the signal in all of this noise, what's the underlying characteristic of this market?” Walters said.

The new research opens the door for ag economists to further study how risk preferences are influencing grain marketing decisions with the economic experimental method. 

“This is a new theory to attach to grain marketing decisions, and by using this type of experimental design for asking these questions, we can see outcomes,” Walters said. “This is really the piece to get the conversation started, and we think this deserves more attention in the literature.

“There still is, today, a very large amount of grain sold at harvest, suggesting the safety-first preferences.”